Marshalling – Guarantor – Bank having charge over property to secure liability of property owner as guarantor of loans to affiliate companies – Claimants having second charge over property to secure loan to property owner – Bank also having charge over affiliates’ own properties – Proceeds of sale of guarantor’s property used to discharge guarantee liability – Whether claimants entitled to benefit of bank’s security over affiliates’ properties under doctrine of marshalling – Claim allowed
In June 2004, the sixth defendant bank advanced a loan to the first defendant company to fund the acquisition and refurbishment of a property in Knightsbridge, London. The loan was secured by a charge over the property. The sixth defendant subsequently made four loans to four other companies affiliated with the first defendant, namely the second to fifth defendants. Each of those loans was secured by a charge over the relevant company’s single asset, which in each case was a flat or house in London. The first defendant guaranteed the second to fifth defendants’ obligations under those loans and its guarantee was, in turn, secured by the charge over the Knightsbridge property. The guarantee was stated to apply to the “ultimate balance that may become due to the bank from [an Affiliate] and until payment of such balance no Guarantor shall be entitled to participate in any security held or money received by the Bank on account of such balance or to stand in the Bank’s place in respect of any such security or money”.
In 2008, the two claimants each made a loan to the first defendant, secured by further charges over the Knightsbridge property. The first to fifth defendants defaulted on their loans. The sixth defendant made a demand for repayment of its loans and a demand under the guarantee. It also appointed receivers, who sold the Knightsbridge property in 2011, producing net sale proceeds of approximately £28m. That sum was sufficient to discharge the first defendant’s borrowings from the sixth defendant and leave a surplus of roughly £7m, which was applied in part satisfaction of the first defendant’s guarantee liability. Had the surplus not been so applied, it would have been sufficient to repay the claimants’ loans.
The claimants contended that, under the doctrine of marshalling, they were entitled to take the benefit of the sixth defendant’s charges over the second to fifth defendants’ properties as security for their unpaid loans. The eighth defendant, the Serious Fraud Office, contended that the remedy sought by the claimants was precluded by the terms of a 2009 restraint order made against the seventh defendant under the Proceeds of Crime Act 2002.
Held: The claim was allowed.
(1) The equitable principle of marshalling applied where a debtor owed money to two creditors, the first of which had security over two or more of the debtor’s properties and the second over only one of those properties. If the first creditor chose to enforce its security over that particular property, leaving the second creditor with nothing, then, in order to do justice, equity applied a principle of maximum distribution and, by a process akin to subrogation, effectively gave the benefit of the first creditor’s other, unused security to the second creditor, to ensure that both creditors were paid as far as possible. The court could marshal the securities so that the creditor with a choice of security satisfied its claims so far as possible out of the proceeds of the security over which the other creditor had no claim: Serious Organised Crime Agency v Szepietowski [2011] EWCA Civ 856; [2011] PLSCS 218 applied. As a general rule, the principle applied only where the securities held by the two creditors were derived from the same common debtor. However, as an exception to the common debtor rule, a disappointed creditor could claim the benefit of securities held by the doubly-secured creditor where one of those securities derived from a principal for whom the debtor stood surety. That exception did not rest on whether the singly-secured creditor could call on the doubly-secured creditor to look first to the principal debtor; instead, it rested on the ability of the surety to call on the principal debtor to pay: Ex Parte Kendall (1811) 17 Ves Jun 514, Brown v Canadian Imperial Bank of Commerce (1985) 50 OR (2d) 420, Sarge v Cazihaven Homes Pty (1994) 34 NSWLR 658 and ACN 077 991 890 Pty Ltd v National Australia Bank Ltd [2007] NSWSC 358 applied.
The sixth defendant bank had a claim against the first defendant as surety for the second to fifth defendants. It could look to two funds to satisfy that indebtedness. The first was the charge over the first defendant’s Knightsbridge property. The second was the charge over the second to fifth defendants’ properties. The latter charge could be brought into account in relation to the claimants’ claim to marshall because, in equity, the first defendant could call on the second to fifth defendants to bear the burden of the debt and those defendants had properties that enabled them to do so. In those circumstances, the doctrine of marshalling, and the exception to the common debtor rule, applied to the case. The claimants could recover against the second to fifth defendants’ properties to the extent, and only to the extent, of the amount that the first defendant had discharged as surety for those defendants.
However, a straightforward application of the doctrine would give the claimants greater rights as against the sixth defendant than the first defendant itself enjoyed, since, under the terms of the guarantee, the first defendant could not compete with the sixth defendant in enforcing the charges over the second to fifth defendants’ properties until such time as the sixth defendant had been completely repaid. Since the claimants’ ability to avoid the constraints of the common debtor rule was dependant on the equities that existed between the first defendant and the second to fifth defendants, then those equities should include not only the right to demand payment but also the rights to enforce any security. Where those rights were restricted by the contract that created the relevant relationship of principal and surety on which the first defendant relied, then that restriction had to be recognised in the marshalling of the security. Consequently, the claimants were entitled to participate in the security constituted by the second to fifth defendants’ charges when, but only when, all sums due to the sixth defendant secured by those charges had been paid, unless the parties agreed on an earlier participation.
(2) The restraint order did not affect the position. The 2002 Act should not be construed so as to enrich the Crown by converting an “interest” that was to be recognised as belonging to the claimants, because of their charge, into an “obligation”, which the 2002 Act required to be ignored, since that would enrich the Crown by depriving the claimants of the right that they would otherwise have had to marshal the securities.
Adam Deacock (instructed by Davenport Lyons) appeared for the claimants; Giles Bedloe (instructed by CJ Jones Solicitors LLP) appeared for the first to fifth and the eighth defendant; Charlotte Cooke (instructed by Freshfields Bruckhaus Deringer LLP) appeared for the sixth defendant; Richard Salter QC and Penny Small (instructed by the Serious Fraud Office) appeared for the seventh defendant.
Sally Dobson, barrister
